XPO Logistics, Inc. — First Quarter 2016 Form 10-Q Summary
Business Context and Reporting Period
XPO Logistics, Inc. reported results for the three months ended March 31, 2016. The company provides global transportation and contract logistics services through its Transportation and Logistics segments, operating in 33 countries with approximately 87,000 employees and 1,440 locations.
Results reflect the substantial expansion from the 2015 acquisitions of Norbert Dentressangle, Con-way and Bridge Terminal Transport, as well as organic growth. The company reported more than 50,000 customers and operated approximately 151 million square feet of contract logistics facility space.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $3,545.7 million | $703.0 million |
| Net revenue | $1,600.6 million | $262.2 million |
| Net revenue margin | 45.1% | 37.3% |
| Operating income (loss) | $62.4 million | $(4.8) million |
| Operating margin | 1.6% | (0.6)% |
| Net loss | $(19.3) million | $(14.7) million |
| Net loss attributable to common shareholders | $(23.2) million | $(15.4) million |
| Loss per diluted share | $(0.21) | $(0.20) |
| Cash flow from operations | $6.9 million | $47.3 million |
| Capital expenditures | $114.7 million | $11.4 million |
- Transportation revenue was $2,297.4 million, with operating income of $75.4 million and a 28.3% net revenue margin.
- Logistics revenue was $1,260.7 million, with operating income of $31.9 million and a 75.4% net revenue margin.
- Interest expense increased to $93.1 million from $23.1 million, primarily because debt was used to fund the 2015 acquisitions.
- The company recorded a $15.7 million income tax benefit and a 44.9% effective tax rate.
- Cash and cash equivalents were $279.0 million at March 31, 2016, compared with $289.8 million at December 31, 2015.
- Total debt was $5,513.4 million, consisting of $134.3 million of current maturities and $5,379.1 million of long-term debt.
- Working capital was $328.2 million at March 31, 2016, compared with $262.8 million at year-end 2015.
Material Changes Versus the Prior Comparable Period
- Revenue increased 404.4%, and net revenue increased 510.5%, principally due to the acquisitions of Norbert Dentressangle and Con-way, supplemented by organic growth.
- Operating results improved from a $4.8 million loss to $62.4 million of income. Management attributed the improvement to higher net revenue and lower SG&A expense as a percentage of revenue.
- SG&A increased to $432.0 million from $115.8 million but declined to 12.3% of revenue from 16.4%.
- Depreciation and amortization rose to $162.1 million from $33.8 million, and amortization of acquired intangible assets increased to $42.0 million from $18.0 million.
- Net loss attributable to common shareholders widened to $23.2 million from $15.4 million because higher operating income was more than offset by increased interest expense and acquisition-related amortization.
- Operating cash flow declined to $6.9 million from $47.3 million, while capital expenditures increased materially as the company invested in equipment and infrastructure.
- Goodwill increased to $4,787.0 million from $4,610.6 million, primarily from purchase-price-allocation adjustments and foreign-currency translation.
Liquidity, Debt and Capital Resources
The company had a $1.0 billion asset-based revolving credit facility. At March 31, 2016, borrowing-base availability was $546.8 million after $261.8 million of outstanding letters of credit and $100.0 million drawn on the facility. XPO was in compliance with the facility’s financial covenants.
During the quarter, financing activities generated $75.8 million, including $200.0 million of revolving-credit borrowings, partly offset by $100.0 million of revolver repayments and $41.8 million of long-term debt and capital-lease repayments. Management stated that operating cash flow, existing cash and revolver availability were expected to be sufficient to finance existing operations.
Guidance, Outlook and Management Commentary
- Management expected 2016 net capital expenditures of approximately $475 million to $500 million.
- The stated strategy was to optimize the integrated global network, improve profitability, cross-sell Transportation and Logistics services, leverage technology, and realize synergies and cost savings from acquisitions.
- Management continued to emphasize disciplined growth, operational integration, customer retention, driver and carrier recruitment, and investment in information technology.
- The filing did not provide a specific revenue, earnings or EBITDA guidance range.
Risks, Contingencies and Unusual Items
- Material risks include substantial indebtedness, acquisition integration and synergy execution, customer and carrier retention, competition and pricing pressure, labor and driver availability, fuel costs, foreign-exchange and interest-rate volatility, technology execution, regulation and litigation.
- The company had numerous lawsuits and administrative proceedings involving alleged misclassification of independent contractors and wage-and-hour claims. Several matters involved putative class actions, and the company could not estimate potential losses in excess of accrued amounts for certain claims.
- Restructuring reserves were $55.5 million at March 31, 2016, after $7.5 million of quarterly charges and $13.2 million of payments.
- The preliminary Con-way and Norbert Dentressangle purchase-price allocations remained subject to adjustment. A Con-way measurement-period update reduced depreciation and amortization expense by $5.8 million in the quarter, relating to the prior quarter.
- On April 23, 2016, after quarter-end, the company entered into a Department of Justice settlement concerning a pre-acquisition government contract investigation. The settlement resolved the related claims; XPO denied wrongdoing. The filing text does not provide the settlement amount.
- Foreign-currency and interest-rate exposures were managed with swaps, options and forwards. A hypothetical 10% strengthening of the U.S. dollar was estimated to reduce net assets by approximately $41.9 million against the euro and $44.2 million against the British pound.
- The company guaranteed certain subcontractor tractor and trailer leases, with maximum guarantees of approximately $14.4 million at March 31, 2016.
Investor Verification Checklist
- Verify the sustainability of operating-margin improvement after acquisition integration, restructuring and transaction costs.
- Assess leverage, scheduled maturities, floating-rate exposure and remaining revolver availability relative to projected cash generation and planned capital expenditures.
- Evaluate whether the $475 million to $500 million capital-expenditure plan is consistent with operating cash flow and debt-reduction objectives.
- Review the final purchase-price allocations, goodwill balances and potential impairment risk for the Con-way and Norbert Dentressangle acquisitions.
- Monitor independent-contractor classification, wage-and-hour and other litigation, including potential losses beyond accrued liabilities.
- Confirm the financial impact and any subsequent disclosures related to the April 2016 Department of Justice settlement.
- Determine whether the company’s acquisition-driven revenue growth is translating into durable organic growth, free cash flow and improved consolidated margins.